FEDERAL COURT OF AUSTRALIA Media World Communications Ltd (Administrator Appointed) v Clark [2004] FCA 1609 PRACTICE AND PROCEDURE – Mareva injunction – sale of technology – misrepresentation – whether the prima facie case alleged supported an inference that the defendants' funds were at risk of dissipation – whether risk of dissipation of assets established. Federal Court of Australia Act 1976 (Cth): s 23 Jackson v Sterling Industries Limited (1987) 162 CLR 612, referred to Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, referred to Patterson v BTR Engineering (Aust) Limited (1989) 18 NSWLR 319, followed Victoria University of Technology v Wilson [2003] VSC 299, considered Mitchell v Saengjan (1994) 117 FLR 273, considered IN THE MATTER OF MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) v ADAM LESLIE CLARK & OTHERS V 1455 of 2004 GOLDBERG J 3 DECEMBER 2004 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1455 of 2004 IN THE MATTER OF MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) BETWEEN: MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) Plaintiffs AND: ADAM LESLIE CLARK First Defendant ADAM 12 HOLDINGS PTY LTD (ACN 093 903 292) Second Defendant ADAMS LABORATORIES PTY LTD (ACN 108 964 941) Third Defendant ADAMS PLATFORM SYSTEMS AUSTRALIA PTY LTD (ACN 102 240 817) Fourth Defendant THE WORLD OF ADAMS PLATFORM PTY LTD (ACN 080 816 217) Fifth Defendant WAP HOLDINGS PTY LTD (ACN 107 757 568) Sixth Defendant JUDGE: GOLDBERG J DATE OF ORDER: 3 DECEMBER 2004 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application to continue and expand the Mareva orders made by Goldberg J on 30 November 2004 be dismissed. 2. The injunctions granted by Goldberg J on 2 December 2004 be discharged. 3. The plaintiff pay the defendant's costs of and incidental to the application made 2 December 2004 for continuation of the orders made on 30 December 2004. 4. The plaintiff file and serve a statement of claim on or before 17 January 2005. 5. The defendant file and serve a defence on or before 8 February 2005. 6. The proceeding be otherwise adjourned to 9.30am on 15 February 2005. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 1455 of 2004 IN THE MATTER OF MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) BETWEEN: MEDIA WORLD COMMUNICATIONS LTD (ACN 061 727 642) (ADMINISTRATOR APPOINTED) and MEDIA WORLD BROADCASTING PTY LTD (ACN 094 923 725) (ADMINISTRATOR APPOINTED) Plaintiffs AND: ADAM LESLIE CLARK First Defendant ADAM 12 HOLDINGS PTY LTD (ACN 093 903 292) Second Defendant ADAMS LABORATORIES PTY LTD (ACN 108 964 941) Third Defendant ADAMS PLATFORM SYSTEMS AUSTRALIA PTY LTD (ACN 102 240 817) Fourth Defendant THE WORLD OF ADAMS PLATFORM PTY LTD (ACN 080 816 217) Fifth Defendant WAP HOLDINGS PTY LTD (ACN 107 757 568) Sixth Defendant JUDGE: GOLDBERG J DATE: 3 DECEMBER 2004 PLACE: MELBOURNE REASONS FOR JUDGMENT Background 1 On 30 November 2004 the plaintiffs issued this proceeding against the defendants seeking damages, injunctions and various declarations arising out of a transaction, or perhaps more precisely, a series of transactions which culminated in the first defendant, Mr Adam Clark, and companies with which he was associated, selling shares in what might be called colloquially "technology" or "media" companies to the plaintiffs. The technology underpinning the shares may be described for present purposes as "the Adams Platform Technology" ("AP Technology"). The AP Technology has been described in a prospectus distributed by the first plaintiff as: "… a unique technology for the representation of very large data sets, such as video, in a much more efficient format. This means that data may be encoded, compressed and decoded more effectively than current tools and techniques allow." 2 The plaintiff companies acquired the AP Technology from companies associated with Mr Clark. There is an issue as to the precise date of the acquisition of the AP Technology. Prior to the date of acquisition the second plaintiff, Media World Broadcasting Pty Ltd (Administrator Appointed) held a licence to use the AP Technology pursuant to an Internet Broadcast Licence dated 9 February 2001 between the fifth defendant, The World of Adams Platform Pty Ltd, and the second plaintiff. There is an issue between the parties as to the precise documents which record or evidence the acquisition of the AP Technology by the plaintiffs. The plaintiffs have put in evidence a number of documents and agreements pursuant to which they say the first plaintiff became the owner of the AP Technology for the amount of approximately $16,919,008. There is an issue between the parties as to the precise documentation which evidenced or constituted the transaction and the amount of the consideration. The defendants contend that the terms and conditions of the sale of the AP Technology are contained in a Share Acquisition Agreement dated 30 September 2003 which was not one of the agreements relied upon by the plaintiffs. The defendants say further that the consideration for the acquisition of the technology was not $16 million or thereabouts but was more of the order of $1 million as some $10 million or thereabouts was paid by the plaintiffs as licence fees pursuant to the Internet Broadcast Licence dated 9 February 2001. 3 Although the plaintiffs rely upon the magnitude and quantum of the amount of $16 million in support of their application for the continuation of a Mareva injunction, it is not necessary to resolve the issue as to the precise documentation which constituted or evidenced the share acquisition or the amount which was paid for the AP Technology. 4 On 30 November 2004 the plaintiffs applied to the court ex parte for a Mareva injunction. The basis for the application was as follows. 5 Prior to the acquisition of the AP Technology by the plaintiffs, the AP Technology had been independently assessed by the CSIRO and the Tolly Group. According to the voluntary administrator of the plaintiffs, the reports from the organisations, though qualified, stated that the AP Technology performed to the claimed specifications. The conclusion of the CSIRO report was as follows: "On the basis of the outcomes described in the report under the scope and methodology supervised and conducted by the consultants as detailed in this report, the CSIRO consultants observed a demonstration that allowed MWB [the second plaintiff], using AP technology, to provide high quality video content on demand only connected to a standard PSTN line through a 33.3 Kbps modem in real time." 6 The Tolly Group report set out the results of tests run on a high‑action clip with varying contrast, considerable subject and camera movement, varying length dissolves, dramatic visual effects and extreme lighting highlights. According to the report, the AP Technology clip: "… provided high‑quality, full‑screen, real‑time video across all link speeds tested down to and including 56 Kbps. No artifacts or jagged motion was observed." 7 After the plaintiffs acquired the AP Technology they obtained an observation report prepared by George Ciotti and Will Spencer, consultants. In late August/early September 2004 a number of demonstrations of the AP Technology were made to the consultants by Mr Clark. The consultants said that during the demonstrations a number of anomalies were observed in relation to the AP Technology. The list of anomalies sets out in some details the issues which had arisen. Mr Clark gave a written response to the anomalies report and thereafter the administrator obtained two reports from experts in computer technology to assess the AP Technology. One report was obtained from PriceWaterhouseCoopers. The report was dated 17 November 2004 and received by the administrator the following day. The report stated, inter alia: "At this point, our analysis has not revealed any evidence of compression technologies that are not already commercially available. An abundance of evidence has been located that indicates the encoding allegedly performed by Adams Platform Technology was actually performed by commercially available hardware and software disguised to make it appear as Adams Platform Technology." 8 The second report was obtained from Dr Tim Ferguson. It was dated 29 November 2004 and received on 30 November 2004. The report stated that, despite some missing details which were set out: "… this report will show that the AP method uses outdated and naďve techniques to compress video. While it cannot be argued that the system is totally incapable of compressing video, there are definite shortcomings to the method that would prevent it from achieving the performance of modern coding techniques." 9 The plaintiffs now contend, through the administrator, that it appears that they have been seriously misled as to the capability and commercial value of the AP Technology having regard to a number of representations which have been made either by Mr Clark or in circumstances where he was associated with the representations. The administrator has set out in an affidavit particulars of the representations which have been made in relation to the AP Technology and a number of matters bearing on the capability and performance of the AP Technology which have been revealed or disclosed as a result of the investigations and reports of PriceWaterhouseCoopers and Dr Ferguson. 10 The administrator contends that it now appears that the AP Technology: · is not a new method of compressing video; · uses commercially available technology; and · is unlikely to be able to compress a video faster than any other commercially available compression method. 11 The administrator has commenced investigations into the asset position of Mr Clark. The administrator referred to a recent article published in the Business Review Weekly which states that Mr Clark purchased 41 hotels from Lion Nathan in or about May 2004. In the ordinary course such an article would be the subject of objection to admissibility on the grounds of hearsay but for present purposes, I take it into account, having regard to the conclusion I have reached. It appears that Mr Clark's interests in the hotels are held through shareholdings in other companies. 12 On 30 November 2004 the plaintiffs applied for a Mareva injunction seeking to restrain Mr Clark and the corporate defendants from encumbering or dealing with any of their assets or causing them to be removed from Australia. Consequential relief was also sought in a well‑known Mareva form. The administrator set out the basis upon which he seeks the Mareva orders in the following terms: "(a) Pursuant to the orders made on 8 October 2004, I am required to forward a report to creditors of MWC and MWB on or before Monday, 6 December 2004. In order to comply with my obligations as administrator of both MWC and MWB, I intend to include in the reports a summary of my investigations into the AP Technology, including the contents of the PWC Report and the Ferguson Report. I also intend to include in the reports my opinion (based on legal advice provided to me) that both MWC and MWB have claims against the Defendants as a result of the misrepresentations referred to above. I am concerned that once the First Defendant, and entities associated with him, become aware of these claims (and, indeed, the contents of the PWC Report and the Ferguson Report) that the assets available to satisfy any future judgment against the Defendants may be dissipated. (b) I am also informed by the solicitors representing the First Defendant that the First Defendant (or entities associated with him) intend to propose a Deed of Company Arrangement. However, at the date of swearing this affidavit, I have not been provided with any such proposal. However, I anticipate that the proposal will provide for payments to be made to unsecured creditors (I note that creditors known to me total $3,594,609.95) and control of MWC and MWB reverting to the First Defendant. Subject to the actual terms of such proposal, and whether it is accepted by creditors, the claims against the Defendants may come under the control of the First Defendant. I believe that if this occurs, the interests of the creditors may be and the interests of the members will be, significantly prejudiced. Now produced and shown to me and marked 'CDC‑34' is a true copy of a list of the creditors of the Plaintiffs known to me. (c) Subject to considering any proposal for a Deed of Company Arrangement that may be made, it is my present intention to recommend to creditors that both MWC and MWB be wound up. If that were to occur, it would be my intention (as liquidator of those companies) to conduct public examinations of a number of parties in relation to the claims against the Defendants. If a proposal for a Deed of Company Arrangement is provided to me, at this stage I do not expect to be able to recommend such a proposal to creditors until I have conducted public examinations of the relevant parties. Accordingly, if a proposal is made, I expect that the only recommendation I could make is that the meeting of creditors be adjourned to enable my investigations to continue." 13 With some hesitation I granted a limited Mareva order on 30 November 2004 until 4.30pm on 2 December 2004 for the purpose of preserving the status quo and enabling the defendants to be heard in relation to the application for the continuation and expansion of the Mareva injunctions. That application was heard on 2 December 2004. The continuation and expansion of Mareva injunctions 14 The plaintiffs' submissions in support of their application for the Mareva injunction can be summarised as follows: · a strong case exists against Mr Clark and the corporate defendants of serious dishonesty; · fraud has been committed; · there has been an improper taking of money in relation to a product which Mr Clark, at all times, knew did not work; · the defendants used commercially available software and created an illusion that it was able to compress data. 15 Mr Crutchfield, who appeared with Mr Fary for the plaintiffs, submitted that I should infer from the nature of the allegations that there was a risk that assets might be dissipated by Mr Clark. 16 The defendants submitted that there was no basis for the making of the Mareva orders as the claims made were of much less value than that claimed by the plaintiffs and that it was inappropriate to deal with only some of the defendants. The defendants also submitted that there was no basis for the suggestion or inference that the Court's processes might be frustrated or that assets would be dissipated if the injunctions were not granted. 17 The jurisdiction to grant a Mareva injunction is now well established and beyond doubt. It is predicated on s 23 of the Federal Court of Australia Act 1976 (Cth) which gives the Court power to make such orders, including interlocutory orders, as the Court thinks appropriate in relation to matters in which the Court has jurisdiction. In Jackson v Sterling Industries Limited (1987) 162 CLR 612, Deane J said at 623 that the general power to grant a Mareva injunction should: "… now be accepted as an established part of the armoury of a court of law and equity to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction." 18 There are two limbs to the basis for the grant of the Mareva injunction. Putting the matter another way, a party seeking the grant of a Mareva injunction needs to establish first that there is a prima facie cause of action or claim against the defendant and secondly, that there is a danger or risk that the defendant will remove assets from the jurisdiction and that the party obtaining a judgment will not be able to have the judgment satisfied. These two criteria for the grant of the Mareva injunction have been expressed with varying degrees of emphasis in the cases. It is clear that there has to be a cause of action which is, at the least, tenable against the defendant. The second criterion has been expressed in somewhat different ways in a number of the cases. What lies as the fundamental basis of the second criterion is that it needs to be established that there will be a frustration of any judgment or that the judgment will be rendered barren on the basis of the risk that the defendant will dissipate its assets or remove them from the jurisdiction. However, recent decisions seem to have lessened the extent to which it is necessary to establish a risk of dissipation. 19 It must be remembered that a Mareva injunction or order is an order of great gravity and one which is most intrusive into the rights of individuals. It is the property equivalent of the writ of ne exeat colonia. In relation to that writ, in Glover v Walters (1950) 80 CLR 172, Dixon J (as he then was) cited Sir William a'Beckett, first Chief Justice of Victoria, in Marquis Ailsa v Watson [1851] 6 RJ 63, referring to Lord Eldon's observation that "this writ … is a most powerful instrument and I never apply it without apprehension". In my view, a similar observation should be made 150 years later in relation to a Mareva injunction. Because of its intrusive and restrictive nature it should be a matter approached by a judge with apprehension. 20 In Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 404 the High Court noted the observation of the Court of Appeal of New South Wales in Frigo v Culhaci (17 July 1998, Mason P, Sheller JA, Sheppard AJA, unreported) that a Mareva order is a drastic remedy that should not be granted lightly and that courts are required to scrutinise applications for Mareva injunctions with care. 21 Counsel for the plaintiffs submitted that it was not necessary for a plaintiff to go to the extent of establishing that there was an actual threat or risk of dissipation of assets by the defendants. Counsel submitted that Cardile's case (supra) makes it clear that the jurisdiction has moved on a long way from having to show on the balance of probabilities a real risk of dissipation. 22 Counsel for the plaintiffs relied on a number of authorities to support the proposition that the Court could infer such a risk from the nature of the cause of action raised against the defendants. Although such an inference may be drawn in an appropriate case (and I shall refer later to this issue) I do not consider that the authorities support the proposition that it is not necessary to show a risk of dissipation of assets such that any judgment obtained would be a barren or empty judgment. Such an inference was drawn by the majority of the New South Wales Court of Appeal in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319. Gleeson CJ, with whom Rogers A‑JA agreed, observed that a plaintiff needed to establish first a prima facie cause of action against a defendant and secondly, a danger that by reason of the defendant's absconding or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied. The majority was satisfied that the nature of the scheme which established the prima facie case against the defendant in that case was such as to justify the conclusion that there was a danger that the defendant would dispose of assets in order to defeat any judgment. Gleeson CJ said at 325: "There is no reason in principle why the evidence which is relevant to the first of the issues earlier referred to might not also have a bearing on the second and this will especially be so where the prima facie case that is made out against a defendant is one of serious dishonesty involving diversion of money from its proper channels." (Emphasis added) 23 Meagher JA delivered a concurring judgment and said at 326: "Normally proof of the first ingredient alone will not suffice; normally one cannot infer a risk of dissipation of assets from the mere fact that the plaintiff has a prima facie cause of action. In normal circumstances this is particularly so in places like the present, where there is no evidence at all what the defendant's assets are. However in exceptional cases (of which the present is unfortunately one) one can infer the existence of the latter ingredient partly or wholly from proof of the former. This may well be the situation in all cases where the plaintiff's prima facie case against the defendant involves proof of gross dishonesty." (It should be noted that in a number of other respects Meagher JA differed in his reasons from Gleeson CJ). 24 Counsel for the plaintiffs also relied upon the reasoning of Redlich J in Victoria University of Technology v Wilson [2003] VSC 299. Redlich J, at par [33] accepted that it was appropriate to infer a risk of dissipation in circumstances where the prima facie case against the defendant involved proof of allegations of serious dishonesty. However, his Honour accepted that a risk of dissipation could not be inferred merely from the fact that the plaintiff had a prima facie cause of action. 25 In Mitchell v Saengjan (1994) 117 FLR 273 Mildren J (sitting in the Supreme Court of the Northern Territory) in substance inferred that there was a sufficient danger that the defendant would remove or dispose of assets with a resulting barren judgment for the plaintiff. He reached this conclusion after reciting a number of factors which existed in that case which according to his Honour, gave rise "to such a feeling of unease that I consider that there is a sufficient danger [of dissipation]". 26 I do not consider that the cases upon which the plaintiffs rely support the proposition that in the present circumstances I should infer a real risk or danger of dissipation of assets, where the result will be a barren judgment, from the nature or circumstances of the causes of action relied upon by the plaintiffs. In contradistinction to Patterson's case (supra), the present circumstances do not involve a diversion of funds. Patterson's case was one in which the plaintiff claimed that the defendant: "… making use of a corporation controlled by him, fraudulently misappropriated a large sum of money which, if it is still under the control of the appellant, would be quite likely to constitute, directly or indirectly, the bulk of his assets." 27 That case, like some of the others referred to by counsel for the plaintiffs, involved a cause of action which had a characteristic bearing upon dissipation. That is not the present case. Although allegations are made which are based upon breaches of statutory provisions such as ss 180‑182 of the Corporations Act 2001 (Cth) and s 52 and s 53 of the Trade Practices Act 1974 (Cth), there is nothing in the factual substratum of those statutory provisions relied upon, as presently disclosed in the evidence, which suggests anything further than misrepresentations or breaches of warranty or statements being made that are known to be untrue. Although the plaintiffs rely upon appellations such as "fraud" and "serious dishonesty", the case is essentially one of misrepresentation. 28 There is no direct evidence of a danger or threat of dissipation of assets by Mr Adam Clark or any other of the defendants. The highest the administrator can put his case is that once Mr Clark and the associated companies become aware of the claims and the contents of the PriceWaterhouseCoopers report and Dr Ferguson's report "the assets available to satisfy any future judgment against the Defendants may be dissipated". That concern, no doubt honestly held, goes no further than speculation and is not in my opinion, any basis for the grant of a Mareva injunction. Further, I am not satisfied that the factual substratum for the claims made by the plaintiffs warrants any inference of a threat of a danger of dissipation of assets. 29 Counsel for the defendants submitted, in substance, that if there was a claim against Mr Clark and his associated companies it was probably for a claim for not more than $1 million. The plaintiffs put their claim at a higher level, namely $16 million. It is not necessary to resolve this issue because the conclusions I have reached apply whether the plaintiffs' claim is for $16 million or $1 million. 30 This is not a case where it is said that Mr Clark or any of his associated companies have been selling assets, re‑arranging assets or otherwise making moves which might be interpreted as the result of a decision to leave the jurisdiction. Conclusion 31 For all these reasons insofar as the application before me is an application to continue the Mareva orders made by me on 30 November 2004 and expand them, I dismiss that application. I also discharge forthwith the injunctions granted by me yesterday, 2 December 2004, which injunctions were otherwise to run until 4.30pm this day or further order. I will hear the parties on any issue as to costs to this date. I certify that the preceding thirty‑one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg. Associate: Dated: 7 December 2004 Counsel for the Plaintiffs: Mr P R Crutchfield with Mr P Fary Solicitor for the Plaintiffs: Maddocks Counsel for the Defendants: Mr M Sifris S.C. with Mr A Trichardt Solicitor for the Defendants: Baker & McKenzie Date of Hearing: 30 November, 2 December 2004 Date of Judgment: 3 December 2004